The impact of the pandemic has been seismic – a global event that has touched all of us - and as we navigate 2021, and the personal and economic impact, we consider a sector that has, in the main, demonstrated strength and growth during 2020. To find out which BDO regions are more dominant in Technology & Media.
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During the pandemic, for some, tech has allowed work, play, learning, shopping, dating, and staying in touch with friends and family to continue in a way that would have been impossible even five years ago.
Therefore, whilst 2020 deal volumes were down on 2019, it is perhaps not surprising that tech mergers and acquisitions (M&A) has been resilient. But what has been happened, and more importantly, are we in a bubble?
Early in the pandemic, private equity funds focussed on securing their portfolios, but with more funds flowing into the asset class, and more than $1 trillion of ‘dry powder’ looking for a home, they could not afford to sit on their funds for long. Moreover, with many sectors such as hospitality and retail facing massive uncertainty, tech businesses have been in the spotlight. What’s not to love about mission critical services, high levels of recurring revenue, scalability and a rise in demand as whole sectors accelerate their digital transformation?
See article: Surviving for recovery, thriving through opportunity
It is a similar story in capital markets, where the FTSE 100 had a difficult year, with a paucity of tech stocks, but the tech-heavy NASDAQ enjoyed a bumper year. AIM’s heavier weighting in the tech sector could therefore, in part, have attributed to its relative success during COVID-19.
These factors, together with low interest rates and quantitative easing, have driven tech valuations to ever higher levels. Scale, perhaps a proxy for resilience, commands a premium, and supports buy-and-build strategies that back known management teams, release synergies and facilitate multiple arbitrage.
Will this change in 2021? Some listed tech stocks appear overvalued, and some even fell when vaccines were announced. In our experience, deal pricing is certainly robust and good quality assets are hotly contested. Nevertheless, it does not feel like the dotcom bubble; businesses have more substance and the fundamental drivers seen in the latter half of 2020 do not look likely to change, even if we do start to come out of the current lockdown and life becomes more normal. There is also the spectre of tax change, which tends to drive M&A as entrepreneurs look to lock in capital gains tax rates and allowances.
Read more: Will capital gains tax rates increase in 2021?
We expect IT services and software to continue to be in focus, benefiting from the digital transformation agenda and, related to this, cyber-security will be in particular demand. The mid-market remains relatively fragmented, but crashing a number of businesses together is not enough – the real value comes from integration, cross-selling and delivering synergies.
Fintech is also likely to see deal activity, with demand being driven by increasing regulation requiring compliance solutions, as well as competition driving the need for automation and customers demanding transparency. Again, it is likely that there will be consolidation.
Read further in, how investment, consumer attitudes and government incentives are driving a Fintech boom.
So, what is the outlook for 2021? All signs are that Tech & Media will continue to dominate the markets for the time being with 22% of our deals in January accounted for Tech and Media.
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